Playing Politics With the Fed

They all laughed at Fulton and his steamboat,
Hershey and his chocolate bar ...
-- George Gershwin

WASHINGTON -- And at Rep. Ron Paul, the 2008 presidential candidate who had the zany idea -- as many laughing people thought -- that the Federal Reserve system could become a sizzling political issue. Ben Bernanke, chairman of the Fed, who does not laugh promiscuously, knows that it is no laughing matter that Paul has 317 co-sponsors (180 Republicans, 137 Democrats) for a bill to open the Fed's books to "audit" by the comptroller general.

The canny congressman cannot accomplish what the title of his best-selling book recommends: "End the Fed." But he probably hopes that if the Fed's transactions with financial institutions were publicized, he and kindred spirits could stir populist resentment of the mysterious institution. Although profoundly mistaken in his objective -- breaking the Fed to Congress' saddle -- Paul is not frivolous. His rage against the Fed is rooted in his rejection of fiat money -- paper money backed by nothing but confidence in Congress (really), and his libertarian enthusiasm for maximizing the role of unmanaged markets in allocating social rewards.

Bernanke on Monday told the Economic Club of Washington that Congress already can examine the Fed's balance sheet. His worry is that Congress, by ordering audits when it dislikes Fed monetary policy decisions, might make the Fed seem subject to, and eventually actually make it subject to, congressional pressure.

At Bernanke's recent confirmation hearing on his nomination for a second four-year term, Jim DeMint, a South Carolina Republican who is co-sponsoring a Senate version of Paul's bill, asked Bernanke: "Do you believe that employment should be a mission, a goal of the Federal Reserve?" Bernanke, who had already noted Congress' "mandate" that the Fed "achieve maximum employment and price stability," answered that the Fed "can assist keeping employment close to its maximum level through adroit policies."

That mandate was, however, improvidently given. Congress created the Fed and can control it, and eventually will do so if the Fed eagerly embraces the role of the economy's comprehensive manager. America's complex, dynamic economy cannot be both "managed" and efficient. Attempting to manage it is an inherently political undertaking and if the Fed undertakes it, the Fed will eventually bring upon itself minute supervision by Congress.